As the African experience shows, there is no alternative to a major restructuring of the Greek debt. Why is this being ignored?

by Jayati Ghosh

It is now clear that the problems of the Greek economy – and the eurozone – have not been and cannot be solved by the large infusion of emergency finance from the ECB and the IMF. The Greek government is being asked to implement austerity measures that will cause a major decline in incomes and employment not just now but in the foreseeable future, and which will not correct the existing imbalances but actually worsen them.

The heavily-indebted poor countries (HIPCs) of Africa could tell the Greeks a thing or two about this process. They could tell them how the deflationary measures that are imposed on governments cause economic activity to go into a downward spiral that destroys existing capacities and prospects for future growth, and pushes large sections of the population into a fragile and insecure material existence. They could tell them about how it is fundamentally unsustainable, because the downslide in GDP makes it ever harder to service the debt, which in turn keep not only piling up, but even expanding, because of the unpaid interest that keeps getting added to the principal and then compounded, so that the country’s debt just keeps rising even with no fresh inflows. They could tell them how ultimately there will be no alternative to restructuring the debt, because the problem will only grow in magnitude even with (and partly because of) the most stringently applied austerity measures. They could tell them about their own experience of several lost decades of economic retrogression, which could have been avoided had the debt restructuring taken place much earlier and a different set of policies for economic recovery been pursued.

This experience should point to the obvious lesson: that there is no alternative to a major restructuring of the Greek debt, involving a loss taken by the international lenders who did not exercise due diligence in the act of lending in the first place. If it does not happen now, it will in any case have to happen at some time in the future, after creating a great deal of material distress in Greece.

Why is such an obvious conclusion not even being talked about? A restructuring of the Greek debt would involve quite a large haircut for the German and French banks who lent extensively during the boom, and helped to create the imbalances that have made the Greek economy less competitive than that of Germany, for example. This cannot be allowed to happen, so the burden of adjustment is placed entirely on the Greek people, for several generations, in what will clearly be an unsustainable process.

It gets worse. Other countries that are seen to have potential problems like Greece are already moving towards austerity measures and contractionary macroeconomic policies that are bound to threaten the frail economic recovery and engender or intensify the next recession. Spain has just announced not only tightening of monetary policies, but fiscal contraction involving cuts in public sector pay and pensions and much else. This is particularly remarkable, because until two years ago Spain ran a fiscal surplus (the deficit was because of the private sector) and its recent deficits are entirely a result of the crisis.

Ireland is already undergoing the most extreme deflationary package involving significant decline in GDP and slashing of public expenditure in all sorts of areas from physical infrastructure to education. The Baltic countries, not only Latvia, which has an IMF programme, but Estonia where the pain is self-inflicted, are experiencing dramatic declines in incomes, employment and wages because of their severe austerity packages. In Romania, there was the remarkable spectacle of the police taking to the streets to protest against their wage decreases. In Britain, the new government is already talking about measures to cut the deficit by slashing spending and raising indirect taxes.

All these countries are hoping that they can export their way out of this mess, but that is simply not feasible as the numbers do not add up. So these countries – and by association, the rest of Europe – are effectively condemning themselves to a period of stagnation or declining incomes, with all the economic and social problems that will generate.

How can such an illogical set of policies be taken so seriously? The problem is that the power of finance – in politics, in media and in determining national and international economic policies – remains undiminished despite its recent excesses and failures. That is why the restructuring of public debts is not on the agenda; that is why talk of fiscal balancing so rarely even mentions taxes on capital, and much less on the same financial sectors that benefited from large publicly funded bailouts and are now holding to ransom the hands that have fed them.

Jayati Ghosh is Professor of Economics and currently also Chairperson at the Centre for Economic Studies and Planning, School of Social Sciences, at the Jawaharlal Nehru University, in New Delhi, India. With C.P. Chandrasekhar, she co-authored Crisis as Conquest: Learning from East Asia.